Penny Stock Technical Analysis
Analyzing a penny stock can be difficult at times but being able to pinpoint certain indicators on a chart can help to decipher between a big opportunity and a losing trade. Technical Analysis, by definition, is the forecasting of future financial price movements based on an examination of past price movements.
Like weather forecasting, penny stock technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis of penny stock uses a wide variety of charts that show price over time.
Technical analysis isn’t just applicable to penny stocks, but also to indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low, or close for a given security over a specific time frame. The time frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action.
Many technical penny stock traders employ a top-down approach that begins with broad-based macro analysis. The larger parts are then broken down to base the final step on a more focused/micro perspective. Such an analysis might involve three steps:
1. Broad market analysis through the major indices such as the S&P 500, Dow Industrials, NASDAQ and NYSE Composite.
2. Sector analysis to identify the strongest and weakest groups within the broader market.
3. Individual stock analysis to identify the strongest and weakest stocks within select groups.
Even though the larger markets may not necessarily impact the micro cap stock and small cap stock segments of the market as a whole, it is good to pay attention to see if what’s happening “out there” could bring a larger influx of traders (who don’t trade penny stocks) to the smaller markets. For example, say there is a penny stock that is dealing within the marijuana space.
If a large company like GW Pharma makes a positive announcement, though it is a larger stock, many marijuana stocks tend to react. Penny stock traders, who general wouldn’t not buy stock in GW Pharma, may look for “bargain prices” with stocks trading under $1. Likewise for something like a biotech stock to buy, large mergers and acquisitions tend to give rise to penny stock investors looking for a “mirror image;” a stock in a company that follows the same processes as the larger company. In the end, it’s good to pay attention to the technical indicators on a chart while also considering what kinds of outside factors may be out there and could be catalysts to trigger technical moves.